A Sneak Peek at the New Rules for Supply Chain Footprinting

The art and science of carbon footprinting is about to take a step forward: The long-awaited launch of guidance for managing network and product lifecycle impacts is just around the corner.

If that’s news to you — and you have anything to do with managing a business with a significant supply chain — here’s your chance to get up to speed.

First, a little background. Carbon footprinting took off in 2001, when the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) established the GHG Protocol Corporate Standard. This standard outlined a practical way to quantify the greenhouse gas (GHG) emissions produced from materials and energy use in business operations.

It did this by offering an accounting framework with three GHG emissions “scopes:” Scope 1 is a sum of emissions from fuel, refrigerants, industrial gases, and other materials combusted or used at sites the company owns or controls; Scope 2 adds up emissions linked to electricity used by those facilities; and Scope 3 encompasses all other emissions in the business value chain.

Measurement of the “internal,” or “operational,” emissions of scopes 1 and 2 has always been straightforward, and thus those standards have been rapidly adopted. Today, a significant majority of the Global 500 companies report on operational emissions.

Scope 3, however, has incited many debates over interpretation. Originally referring to emissions from supply chains, including products, waste, distribution, and travel, Scope 3 outlined a much larger and more complex set of issues than those that characterize emissions from internal operations.

While Scope 3 has always been recognized as important, and indeed reporting has been growing, companies have been clamoring for more detailed guidance. Many companies have focused on addressing more easily measured Scope 3 activities, such as business travel and employee commuting. Also, business networks, such as the Clean Cargo Working Group and the Electronics Industry Citizenship Coalition, have begun developing shared approaches for issues very focused on their industries.

But there has not been a common language for measuring Scope 3 impacts in detail across industries. That’s about to change.

By summer 2011, WRI and WBCSD will finalize the Scope 3 standard and the related Product standard. This will be the result of a three-year project involving more than 1,500 diverse stakeholders from governments, research institutions, businesses, and civil society, all contributing to various discussions and drafts. BSR and many of its member companies have been represented in a technical working group.

Unofficially, this has been even longer in the making. A year after the 2001 launch of the first edition of the Corporate standard, a working group explored ways to flesh out Scope 3 with lifecycle assessment tools, finding that significant time and effort would be needed to produce an effective framework.

What led us to this final chapter? Brian Glazebrook, a senior manager of social responsibility at Cisco Systems who has been involved with Scope 3 efforts from the start, says that lifecycle and supply chain information is becoming more commoditized and therefore less expensive, while at the same time there is more demand for transparency. We have crossed a threshold that is making Scope 3 management undeniably more attractive to companies, and the case to do more will only become stronger.

Following are highlights of a recent discussion I had with Pankaj Bhatia (pictured below), director of the GHG Protocol at WRI, offering a preview of what’s to come.

Ryan Schuchard: Pankaj, how will the Scope 3 standard help companies?

Pankaj Bhatia: It will enable them to develop an organized understanding of the impacts, risks, opportunities, and considerations from energy and other sources of GHG emissions throughout business networks and relationships. As a comprehensive accounting and reporting framework, it will facilitate identifying GHG reduction opportunities, setting reduction targets, and tracking performance in value chains. In turn, it will provide a sophisticated framework for reporting to the Carbon Disclosure Project and the Securities and Exchange Commission, in annual CSR reports, and for other GHG transparency programs and B2B initiatives. It also may lead companies to develop stronger relationships with suppliers by reducing waste and improving efficiency through GHG management in their supply chains.

RS: What kinds of companies should utilize it?

PB: The Scope 3 standard is written for companies of all sizes in all economic sectors. It is especially applicable to three types of companies: (1) those with significant emissions in their upstream or downstream activities, (2) those that would like to engage and inform their stakeholders about their value chain emissions and performance, and (3) those wanting to identify business risks and opportunities in their value chain and develop strategies to minimize risks and leverage opportunities.

RS: Is it a full “standard” — in the way the GHG Protocol Corporate Standard is a standard?

PB: Yes. A GHG Protocol publication qualifies as a standard if it provides verifiable accounting and reporting requirements. The standard uses the term “shall” (e.g., “Companies shall account for and report all Scope 3 emissions and disclose and justify any exclusions.”) to indicate what is required for a GHG inventory to be in conformance with the Scope 3 standard.

Companies may use the inventory information to identify, prioritize, and guide innovative emissions reduction activities within and across Scope 3 activities. For example, a company whose largest source of value-chain emissions is contracted logistics may choose to optimize these operations through changes to product packaging to increase the volume per shipment, or by increasing the number of low-carbon logistics providers. Additionally, companies may utilize this information to change their procurement practices or improve product design or product efficiency, resulting in reduced energy use.

RS: Will there be any completely new ideas?

PB: Yes. Scope 3 emissions are now categorized into 15 distinct, mutually exclusive categories that avoid double counting. These categories are intended to provide companies with a systematic framework to organize, understand, and report on the diversity of Scope 3 activities within a corporate value chain.

Also, there is more guidance on characterizing confidence in data. This guidance was requested by stakeholders, since Scope 3 emissions data may be relatively less accurate and precise than Scope 1 and Scope 2 emissions data. Additionally, the Scope 3 standard allows for a range of data collection and calculation approaches, with a varying range of data quality. Scope 3 data may include reliance on value chain partners to provide data, broader use of secondary data, and broader use of assumptions and modeling (such as for downstream emissions categories, such as the use of sold products by consumers).

Higher uncertainty for Scope 3 calculations is acceptable as long as the data quality of the inventory is sufficient to support the company’s goals and the information needs of key stakeholders such as investors, while providing transparency on limitations of the Scope 3 data to avoid potential misuses. Companies are therefore required to provide a description of the accuracy and completeness of reported Scope 3 emissions data and a description of the methods and data sources used to calculate the inventory. The standard provides descriptions of accuracy and completeness, guidance on describing data quality, and guidance on uncertainty. The standard doesn’t require companies to provide a quantitative confidence level or confidence interval associated with the reported emissions data — though this is optional.

RS: Will the standard provide a good tool to compare companies against each other?

PB: No and yes. First, it is important to understand the limits. Companies’ selection of one or more Scope 3 categories and their choice of whether to base measurement on operational control or financial investment is based on considerations that aren’t easily comparable across companies, like corporate vision and business risk. That means even companies that seem like peers may not prioritize the same things, so it would not be meaningful to uniformly prescribe what should “count.” Also, within categories, the level of data quality and control will vary with the level of vertical integration and the public data infrastructure where sites are located.

What it will enable is comparison of the level of depth that companies measure and report on. This will help to clarify that a larger footprint doesn’t necessarily mean a company is worse off, but rather, that it might be examining its networks in more detail. Also, while the standard won’t provide a robust way to directly compare GHG performance between companies, it will let a company measure performance against its own baseline, which potentially could be compared between companies.

As companies take up this type of reporting, there will be opportunities to develop more specific norms and benchmarking for better comparability among more specific situations. In many ways, that’s what this standard provides—a platform that creates unified language across industries for going deeper on comparisons of key applications through development of sector-specific rules.

RS: What kind of data will companies need to gather to measure Scope 3?

PB: The standard asks that companies select data that is most representative in terms of technology, time, and geography; most complete; and most precise. We have categorized data needed to calculate Scope 3 emissions into two types: primary data and secondary data. Primary data means specific data provided by suppliers or other companies in the value chain related to the reporting company’s activities, including primary activity data, and emissions data that is calculated using primary activity data (e.g., primary activity data combined with a secondary emission factor). Primary data does not include financial data (e.g., spend) used to calculate emissions.

Secondary data refers to industry-average data (such as from published databases, government statistics, literature studies, and industry associations), financial data, proxy data, and other generic data. Primary data and secondary data each have advantages. For example, primary data best enables performance tracking of individual value chain partners and supply chain GHG management, while secondary data can be a useful tool for efficiently prioritizing investments in primary data collection and for tracking emissions from minor sources.

Choosing the appropriate type of data depends on the company’s business goals. The standard asks companies to make sure that the data quality of the Scope 3 inventory is sufficient to ensure that the inventory is relevant — both internally and for a company’s stakeholders — and that it supports effective decision making.

Companies may find that for a given activity, secondary data is of higher quality than the available primary data. In this case, if the company’s primary goal is to maximize the data quality of the Scope 3 inventory to improve decision making where accuracy is important, it should select secondary data. If the company’s primary goal is to set reduction targets and track performance from specific operations within the value chain, or to engage suppliers, the company should select primary data.

RS: What does the Scope 3 standard have to do with the Product standard?

PB: While the Scope 3 standard covers measurement and accounting to characterize the many broad types of corporate networks and relationships, the Product standard focuses on a view of the whole lifecycle of individual products. These two standards, which have been developed in parallel, share many features in common: accounting principles, approach to data allocation, approach to data collection, and treatment of confidence. A key difference is that a Scope 3 inventory is structured by organization-wide business activities, such as leased operations and employee travel, while a Product inventory is organized by key stages in the lifecycle of a product, like processing and recycling. These two different tool sets reflect two different needs: on the one hand, characterizing products’ lifecycles, especially from the view of the customer; on the other, examining the administration of organizational interrelationships and networks, something investors in particular are concerned about.

Watch for the release of the final Scope 3 and Product text next spring, and contact Ryan if you have questions.

First posted at GreenBiz.

BSR Kicks Off New Energy Management Collaboration…and Just in Time

I’ve just returned from China where I attended the launch of BSR’s Energy Efficiency Partnership (EEP), a working group of 11 member companies working with 80 of their suppliers on energy management.

Participants discussed the many reasons why this is an important—and urgent—issue for their companies. Starbucks’ Director of Ethical Sourcing Kelly Goodejohn explained in an opening presentation that climate change poses a substantial threat to coffee, the company’s core business, and that energy management is the most direct thing they can do to stop greenhouse gases (GHG).

Felix Ockborn, a member of H&M’s Far East CSR Program Development team, relayed that working with suppliers to mitigate climate change impacts is vital to H&M’s CSR strategy because the issue is important to its customers. He also said that it is a fundamental part of working toward sustainable use of natural resources in H&M’s value chain.

The one issue, however, on everyone’s mind was the recent pressure from the Chinese government to curb energy waste, which resulted in the mandatory closure of more than 2,000 factories and the shutdown of power to companies in major manufacturing provinces like Jiangsu and Anhui. This obviously has a major impact on companies: An auto-components maker reported that it had to slow production, and a cement factory said it would have trouble meeting orders and likely lose work in progress.

The shutdowns are part of China’s efforts to meet its current five-year plan commitment to reduce energy intensity by 20 percent from 2005 levels. All signs indicate that such pressure will increase: The next five-year plan (due out soon) is likely to include even more stringent targets, and last year’s goal to reduce GHG emissions by 40 to 45 percent by 2020 will also warrant additional measures.

EEP member, HP, has been keeping a close eye on these kinds of developments. Ernest Wong, Manager of HP’s Social and Environmental Responsibility Supply Chain program, said it’s important for factory managers to have tools for energy management so that they can understand their exposure and communicate their situation. In turn, explained Wong, it’s important for companies like HP to have a good picture of how suppliers can have better energy-saving plans and use energy management to minimize their carbon footprints.

We have a lot of exciting work to do. From helping executives in the board room understand the impacts of and options for energy efficiency to enabling managers on the shop floor to take action, I look forward to working with EEP to explore how companies can get the most out of energy management and raise awareness about the importance of working with suppliers to conserve energy.

First posted at BSR.

Five Lessons from Walmart’s Supply Chain Work in China

Late in 2008, following Walmart Vice Chairman (now CEO) Mike Duke’s announcement that the company would improve the energy efficiency of its top 200 China-based suppliers by 20 percent by 2012, Walmart enlisted BSR to help launch its first supply chain energy-efficiency efforts in China.

From our post in Walmart’s Shenzhen global procurement headquarters, we started by studying how the successes of Walmart’s U.S.-led Supplier Energy-Efficiency Project could be adapted to China’s unique environment. We then led a launch meeting, trainings, and the development of measurement tools to connect suppliers with energy-service companies.

In its first year, the program recorded an increase in efficiency of more than 5 percent in more than 100 factories, and revealed that suppliers had the capacity to do much more. That success emboldened Walmart to announce it would eliminate 20 million tons of greenhouse gas (GHG) emissions from its supply chain — about 40 percent of the collective annual commitment of the nearly 200 companies (PDF) in the U.S. Environmental Protection Agency’s Climate Leaders program, as of late 2009. That’s progress as far as sustainability is concerned, but it’s also good business sense: Walmart, a relentless cost-saver, sees it as a way to make suppliers leaner, more resilient, and more competitive.It’s time for more companies to follow Walmart’s lead. By expanding energy-efficiency efforts into their supply chains, companies can quickly and substantially decrease supplier costs, substantially reduce greenhouse gasses, produce satisfyingly quantifiable results, and provide a gateway for further sustainability initiatives. There’s never been a better time to start: With the long-awaited GHG Protocol guidance on “Scope 3” GHG accounting scheduled for release in December, an era of more comprehensive supply chain reporting is imminent.

Companies whose supply chains lead to China should start there, because the opportunity is profound. On average, Chinese supplier factories are five times less efficient than factories in the United States, and the country is the No. 1 emitter of GHGs. By cutting energy waste in China, it’s possible to reduce the world’s energy demand by 5 percent.

Fortunately, energy-efficiency investments in China are cost-effective (PDF) compared with similar initiatives in industrialized countries. In spite of this, improved energy efficiency has not taken off in China because the country suffers from an inefficient market. Factory managers and other energy users often don’t have meaningful diagnostics about the price of energy, government subsidies make it cheap to waste energy, energy-management contracts are hard to implement, and people in positions to improve efficiency — building owners, investors, and tenants — often aren’t the ones paying the bills.

The problem is vivid when considering that neighboring Hong Kong, one of the world’s most energy-efficient regions, has a thriving industry of energy-service companies (known as “ESCOs”) that identify energy-saving opportunities and then install and locate funding for energy-saving equipment.

On the bright side, this shows that the challenge for companies is not one of engineering, equipment, or even finance. Instead, it’s about taking pieces of the puzzle that are already there and putting them together. For these reasons, China is one of the best places for companies to start scaling up knowledge about climate-related supply chain risks and opportunities, communicating results to investors, and improving climate performance by leveraging business networks.

The job of international companies in supply chain energy efficiency is to keep China’s specific challenges in mind and build bridges between ESCOs and suppliers. What follows is a series of steps based on our recent experiences working with Walmart that can help companies effectively engage suppliers in China on energy efficiency:

1. Establish Common Ground

Often in China, suppliers see productivity as a distraction from growth (PDF), and by extension they can be skeptical about consulting services and the value of pursuing savings versus top-line sales. Such suppliers may agree to participate in a company’s program but are unlikely to make significant progress over time until their culture rewards enhanced managerial productivity in general. Therefore, companies should begin their engagements on efficiency by surveying suppliers’ views about continuous improvement broadly and then educating them on that subject early and often.

2. Show the Road Map

When it comes to labor compliance, companies like Nike have famously warned (PDF) that demanding conformity on its own is not likely to yield sustained and honest results. On the other hand, sustainability initiatives are likely to take hold only if the specific action requirements include goals, timelines, and rules that are made clear at the outset.

Ensuring that suppliers head in the right direction means showing them clear pathways, with options, in a road map. This was confirmed for us at Walmart’s first launch meeting, where suppliers and ESCOs agreed that Walmart’s 20 percent goal, five-year timeline, and detailed participation guidelines enabled the suppliers to get traction.

Sharing the road map with suppliers is also a good way to make action seem urgent, which is a strong additional motivator. Finally, providing a road map is a good way to encourage suppliers — which may be reticent to make long-term commitments without good prospects for continued business — that the program is meant to drive long-term collaboration.

3. Require Accountability

Just like with sustainability efforts more broadly, suppliers are best positioned for progress when senior management sponsors the initiative, and then teams are instituted to execute objectives with clear roles, responsibilities, and substantial performance consequences. At our Walmart launch meetings, we included both operations managers and senior leaders, and we emphasized to executives the ease and benefits of participation. Another ingredient for accountability is open communication between suppliers and companies. On one level, companies should review suppliers’ progress frequently (ideally quarterly) to ensure continued momentum. On another level, companies should make a help line available to quickly answer suppliers’ questions. Companies should also pay close attention to demonstrated commitments to management systems like named teams and action plans, because these programs can predict whether the supplier will succeed.

4. Build Capability

Next, companies should integrate into their programs efforts to help suppliers understand where and how to focus tactics. This includes teaching factories how to identify low-hanging fruit, and understanding expected inefficiency hotspots and challenges to implementation.

According to surveys we have taken during BSR’s China Training Institute events, operations managers consistently identify training as the top need in successfully starting energy-efficiency programs. Many don’t have a strong energy or efficiency background, in part due to the prevailing focus on growth, so providing insight and resources through trainings, call-in lines, and diagnostic tools are often critical resources.

5. Solve the Problem Itself

A final step is for suppliers to identify and deploy efficiency solutions, such as retrofits with better lighting and cooling systems, by tapping into the ESCO industry. However, many ESCOs aren’t arranging deals in China because the lack of infrastructure makes energy savings difficult to verify, and contracts can be hard to enforce (PDF). Companies can help efficiency projects take hold by making the cost of doing business easier for ESCOs. For example, companies can host forums gathering both ESCOs and suppliers, and inform them of possible opportunities by sharing statistics and needs revealed in the suppliers’ reports.

First posted at GreenBiz.

10 Climate Trends That Will Shape Business in 2010

As 2010 begins, there are looming questions about climate change action: Will the political agreement made in Copenhagen in 2009 be developed by the next “COP” meeting to include detailed targets and rules? Will those targets and rules be binding?

What will happen with the U.S. Senate’s vote on cap-and-trade? Will U.S. public opinion about climate change — which has a major impact on how the Senate votes — ever begin to converge with science?

There’s no doubt that the year’s most interesting stories could turn out to be “black swans” that we can’t currently foresee. But even amid the uncertainty, there are some clear trends that will significantly shape the business-climate landscape.

1. A Better Dashboard

Carbon transparency isn’t easy — it takes science, infrastructure, and group decisions about standards to allow for more accurate information. We have started moving in that direction. Web-based information services provide illustrations: country commitments needed for climate stabilization, indications of where we are now, and the critical path of individual U.S. policymakers.

Meanwhile, more attention is being paid to real-time atmospheric greenhouse gas (GHG) concentrations, remote sensing technology that tracks atmospheric GHGs, and a new climate registry for China. As these data tools become more available, business leaders should begin to see — and report on — a clearer picture of their company’s real climate impacts.

2. Enhanced Attention to Products

There are signs that more consumers will demand product footprinting — that is, a holistic, lifecycle picture of the climate impacts of products and services ranging from an ounce of gold to a T-shirt or car. Fortunately, a new wave of standards is coming. The gold-standard corporate accounting tool, the Greenhouse Gas Protocol, aims to issue guidance on footprinting for products and supply chains late in the year, and groups like the Outdoor Industry Association and the Electronics Industry Citizenship Coalition plan to publish consensus-based standards for their industries in the near future.

3. More Efforts to Build Supplier Capacity to Address Emissions

With more attention on products comes an appreciation of product footprinting’s limitations. Many layers of standards are still needed, from the micro methods of locating carbon particles to time-consuming macro approaches defining common objectives through group consensus. Accurate footprinting that avoids greenwashing requires statistical context, especially related to variance and confidence levels, that companies often think stakeholders don’t want to digest.

Progressive companies such as Hewlett Packard, Ikea, Intel, and Wal-Mart are therefore pursuing partnerships with suppliers for carbon and energy efficiency, and they are focusing their public communications on the qualitative efforts to build supplier capacity–as opposed to pure quantitative measurements, which can imply more precision than really exists.

4. Improved Literacy About the Climate Impacts of Business

The bulk of companies’ climate management falls short of directly confronting the full scale of effort required to address climate change. That’s partly because organizational emissions accounting tends to treat progress as change from the past, as opposed to movement toward a common, objective planetary goal. But companies are becoming more aware of the need to be goal oriented. Firms such as Autodesk and BT have begun bridging this gap by illustrating that there is a common end–which is measured in atmospheric parts per million of emissions–and that company metrics can be mapped to their share of their countries’ national and international policy objectives toward them.

5. More Meaningful Policy Engagement

Related to the previous item, more companies realize that pushing for the enactment of clear and durable rules to incentivize low-carbon investment is one of the most direct things they can do to stabilize the climate. Therefore, more companies are engaging earlier — and in more creative ways — in their climate “journey.” There is growing realization that you don’t have to “reduce first” before getting involved.

There is also a general awakening to the fact that strong climate policy is good for jobs and business. Already, more than 1,000 global companies representing $11 trillion in market capitalization and 20 million jobs (PDF) agree that strong climate policy is good for business. There has never been a better time to get involved, especially in the United States, where the Senate is expected to vote on domestic legislation by Easter. Effective corporate action can help fence-sitting senators (PDF) gain the support they need by educating the public in their districts about the importance of strong climate policy.

6. Higher Stakeholder Expectations

As climate management enters the mainstream, stakeholders expect companies to do more, and watchdogs will find new soft spots. Companies should be prepared for new stakeholder tactics, such as the profiling of individual executive officers, who are perceived as having the greatest impact on company positions, and heightened policy advocacy efforts. The media’s role in promoting public climate literacy will continue to rank as an important part of stakeholder expectations. Currently, the U.S. public, which plays an important role in the critical path to a global framework, has far less confidence about the importance of acting on climate than scientists do, and the media can help educate them.

7. Increased Power of Networks

Economists see energy efficiency as a solution to 40 percent or more of climate mitigation, and with the technology and finance already available globally, companies can play a significant role in accelerating progress. While the price makes the energy market, and policy helps to set the price, companies like Walmart have shown that creating expectations for performance improvement, while providing tools and training, can help suppliers and partners clear the economic hurdles they need to get started. After this initial “push,” experience shows that suppliers take further steps on their own. As more companies take on supply chain carbon management, watch for lessons on how to do it effectively.

8.    More Climate Connections

Energy efficiency, which constitutes the core of many companies’ climate programs, offers a platform for broader resource-efficiency efforts. We expect to see many companies expand their programs this year to address water. Given that this is the “Year of Biodiversity,” we can also expect more movement related to forestry and agriculture. The nexus between climate change and human rights is also likely to become a hot topic, building on momentum developed during the run-up to Copenhagen.

Finally, watch for the climate vulnerability of mountain regions to gain attention, due to increased environmental instability, disruption of natural water storage and distribution systems, and stress on ecosystem services in regions near human populations.

9. Greater Focus on Adaptation

Climate management has already broadened to include adaptation, and this will receive increasing attention in 2010. This is already evident in company reporting, as evidenced by responses to the Carbon Disclosure Project (see answers to questions 2 and 5 about physical risks and opportunities). Companies are addressing many adaptation-related issues, including insurance, health, migration, human rights, and food and agriculture. It is important to note that adaptation efforts can–and must–also support mitigation, as in the case of resource efficiency.

10. More Political Venues Up for Grabs

The Copenhagen Accord (PDF) was produced only during the last few hours at COP15, as part of a last-ditch “friends of chair” effort involving around 25 countries. This nontraditional process proved to be an effective way to move swiftly in getting broad support, yet still failed to achieve consensus in the general assembly, with a small handful of nations vetoing due to a few apparently intractable disputes. In consideration, there are growing calls for additional forums beyond the regular United Nations Framework Convention on Climate Change process, to offer more responsive action in developing the global climate agreement needed.

Most notably, attention is on the G-20 countries, a group that comprises the vast majority of emitters and has shown that it can move efficiently, even while avoiding the troublesome distinction between developed and developing nations. Country associations are also changing. For example, instead of “BRIC” (Brazil, Russia, India, and China), we are more often hearing about BASIC (BRIC minus Russia plus South Africa) and BICI (BRIC minus Russia plus Indonesia). The point is, before Copenhagen, most thought updating Kyoto meant developing a global treaty through the formal U.N. structures. Now there is growing appreciation of the opportunity for complementary efforts, and new countries are coming to the fore in multilateral engagement.

In 2010, business leaders will be considering their best next steps after Copenhagen. At the same time, as BSR President and CEO Aron Cramer has written, while an overall framework agreement is important, we need to look beyond forums like Copenhagen for real results on climate — and that means looking to business. Business is important for two reasons: By engaging in policy, business can help increase the likelihood that policymakers will develop a strong framework. And by innovating and committing to progress, business will help a treaty achieve desired results.

At BSR, we will be tracking the opportunities related to these trends and working with business to focus on innovation, efficiency, mobilization, and collaboration for low-carbon prosperity. For more information about how your company can contribute, contact me at rschuchard@bsr.org.

First posted at GreenBiz.

A Green Supply Chain Starts in China

As companies work to reduce their carbon footprint, the easiest steps to take are often the closest to home.

Yet for companies with global operations or supply chains, the biggest practical wins are likely to be found in improving energy efficiency of owned and supplier facilities overseas, where they have the ability to multiply impacts across tens, hundreds, or even thousands of sites through relatively simple central coordination.

For companies looking to increase their supply chain’s energy efficiency, China is a good place to start, for a number of reasons:

• China is a top location for energy-intensive manufacturing and a key node of many supply networks.
• As the No. 1 emitter of greenhouse gases, China is likely to face more regulatory pressure to improve its performance.
• Due to its size, China is an ideal place to take energy-efficiency programs to scale.

BSR has spent the last several months helping Walmart establish its supplier energy efficiency program in China, where the company has set a target of improving the energy efficiency of 200 factories by 20 percent over the next three years. Working with Walmart, we have seen firsthand how initiatives from other countries can be adopted and adapted to the Chinese context.

This is BSR’s guide to starting energy efficiency programs at company operations and in company supply chains in China.

First, the Basics of Building a Successful Program Anywhere

Be Flexible. Effective energy-savings programs, particularly for owned operations, often focus on a specific goal but leave significant flexibility for how corporate targets will be met. Rather than taking a strictly top-down approach that regulates specific changes in technology and behavior, BSR recommends developing an initiative based on strong leadership and a clear mandate for change. This allows internal business units to find their own solutions and strategies for meeting targets.

The need for flexibility and autonomy is even more pronounced when companies deal with suppliers. Companies often have limited visibility into where the most significant energy savings might be in supplier operations. The best approach is therefore to provide specific tools or approaches that suppliers can use to discover and implement customized solutions for themselves.

Focus on the People and Systems, Not Advanced Technology. Companies usually gain more by investing in existing people and systems rather than expensive new technologies. For example, Swire Beverages, a major Hong Kong-based bottler, has created energy-management committees composed of production, engineering, environmental health and safety (EHS), and facilities managers who meet regularly to explore possible opportunities for reducing waste and increasing the productivity of manufacturing and logistics processes.

Get Buy-in From Senior Management. This is essential to establish a clear direction and goals for people within the company. Many of the most successful initiatives have been started by executives who challenged employees to reduce energy use or carbon emissions, and then charged each department with determining how to do it. In this way, management can solicit opinions from employees and reward those with innovative ideas. Inter-departmental competition can make the process fun and increase employee engagement. These management techniques can turn employees into an asset rather than a barrier to energy efficiency and waste reduction.

Management buy-in is also necessary when working with suppliers, even if they are small factories. In this situation, while you may target facilities or EHS personnel with trainings and tools, the general manager or other central decision-maker should be your direct liaison.

Don’t Wait to See the Data Before You Act. Good data can help you justify new programs and is important for evaluating progress toward goals, but program development can be unnecessarily slow if the initial focus is on assessment of current energy usage. During start-up, while you are building the system and processes for data reporting, most information should actually be flowing toward suppliers, in the form of trainings, tools, and ongoing support. With this approach, suppliers are more likely to align with the emphasis on action, which subsequently can be supported by trustworthy reporting.

Managing from Afar

The lack of hands-on operational control can present challenges — especially for companies with a large supplier base. To ensure that your program is creating the right incentives, invest time and resources in designing the appropriate system for reporting, monitoring, verification, and communicating the right message to suppliers.

Here are some tips for an effective supplier program:

• Clearly communicate goals, progress, and incentives. Demonstrate your own commitment with clear, quantitative expectations, and then work closely with suppliers to monitor and track progress, and share successes and challenges with other relevant stakeholders.

• Focus on multiple benefits. Energy-saving efforts can provide significant financial returns for suppliers.

• Emphasize that you are building long-term relationships with suppliers. Suppliers will recognize the need to be in line with the company’s goals and values to maintain the relationship, and with an emphasis on long-term partnership, suppliers can make investments that require a longer payback period.

• Explore cost-sharing options. In one supplier program, a global furniture firm paid the program and consulting fees, while the factory paid for energy meters.

• Promote open communication. Frequent and transparent communication on progress is an important way to provide both support and resources, and to collect credible data to verify claims about energy savings and emissions reductions.

Second, What’s Special About the Chinese Context?

Many of the lessons from BSR’s energy-efficiency work in China are equally valid for other locations, but working with suppliers in China has specific challenges related to the regulatory context, economic incentives, and the availability of technical and financial resources.

When working in China, business leaders should:

• See the government as not just a regulator but also a resource. The Chinese government has become increasingly proactive in encouraging improvements in energy intensity (amount of energy used per unit of GDP), and the government’s new regulatory targets have been accompanied by resources and training support for manufacturers. Government can also provide advice on project implementation as well as clear direction on how energy-intensity targets are being applied and measured.

• Watch utility and fuel prices. Currently, water and electricity are heavily subsidized, which limits the return on energy-savings investments. The economic argument for energy efficiency will be stronger when utility prices rise in accordance with government plans. Some cities and provinces are already beginning to test price increases. Be prepared to take advantage of improvements in the economic argument for energy savings, but meanwhile look for other ways to strengthen the business case.

• Seek financial help. Many sources provide financial help for energy-efficiency investments, including local governments, energy service companies (ESCOs), the Hong Kong Productivity Council, the International Finance Corporation’s  China Utility-Based Energy Efficiency Program, the P2E2 program (a partnership between the U.S. Environmental Protection Agency and China’s State Environmental Protection Administration), and international and local banks.

• Use ESCOs to fill knowledge gaps. The ESCO market in China is young but growing rapidly, with both domestic and foreign service providers offering a range of consulting and project-management services. Some cheap, do-it-yourself methods such as installing energy meters can create useful data to help suppliers understand where the energy savings opportunities lie, so they can make an informed decision about when to call for external consulting expertise. BSR has also been working with ESCOs to provide low-cost technical training sessions for factory managers, as consultants are often willing to share basic information and tips on energy management at supplier forums and workshops.

Work on energy efficiency in China has been gradually building for a few years, and it is now expanding rapidly as an increasing number of global companies endeavor to improve supplier performance along with their own environmental impacts. This presents a real opportunity for global companies with operations and supply chains in China to make a bigger impact in emissions reduction.

First posted at GreenBiz.